PROBLEM: The US dollar has soared over 20% in the past year, taking it to a two decade high versus other major currencies. This is having significant negative international impacts, from tightening financial conditions to exporting high inflation. As US Treasury Secretary Connally famously said ‘the dollar is our currency, but it’s your problem’. But this is not a one-way street. The stronger dollar is also holding back US corporate earnings growth, whilst giving a welcome competitiveness boost to many European and Asian exporters (see top right quadrant of chart).
DOLLAR: The US dollar truly dominates the global financial system, making up around 65% of international debt, 60% of global currency reserves, and 45% of all currency trading. This is dramatically larger than the US’s one quarter weight in the global economy. It is also around three times the usage of its nearest currency competitor, the Euro. Recent dollar strength has stopped US inflation being even worse than its current 9.1% level, by dampening import prices. The dollar surge may stabilize as Fed’s rate hike pace, and global risk aversion, slowly ease.
OVERSEAS: The flip side of the very strong US dollar have been weaker overseas currencies. These are providing some competitiveness support to many trade-dependent economies and export-focused companies. These are focused on Europe and developed Asia. By contrast, even though the US is a more domestic focused economy and stock market the costs of dollar strength are clear. S&P 500 index earnings are being haircut around 5%, or ⅓, by current dollar strength. This is led by the hard-hit tech sector which generates over 60% of its sales abroad.
All data, figures & charts are valid as of 14/07/2022